practical problem( leverages)

PRACTICAL PROBLEMS :-


1.Following information is given calculate operating leverage, financial leverage and combined leverage:



Sales                                      4,00,000
Less: Variable cost                1,40,000
CONTRIBUTION                 2,60,000
Less:fixed cost                      1,80,000
EBIT                                        80,000
Less:Interest                            10,000
EBT                                         70,000

ANSWER:- OPERATING LEVERAGE = CONTRIBUTION / EBIT
                                                                     
                                                                  =2,60,000
                                                                     80,000
                                                                  =3.25

                    FINANCIAL LEVERAGE= EBIT/EBT
                                                           
                                                                 =80,000
                                                                 70,000
                                                                =1.14

                COMBINED LEVERAGE=  OLXFL
                                                                   =3.25X1.14
                                                                   =3.705

2.GIVEN

FINANCIAL LEVERAGE=2:1
OPERATING LEVERAGE=3:1
INTEREST=20,00,000
TAX=40%
VARIABLE COST TO SALES=60%
FIND EBIT,CONTRIBUTION,AND FIXED COST

 ANSWER:-FINANCIAL LEVERAGE=   EBIT
                                                                        EBT
                                                       2:1=EBIT/EBT
                                                       2:1=EBIT/(EBIT-INTEREST)
                                                       2:1=EBIT/(EBIT-20,00,000)
                                                      2EBIT-40,00,000=EBIT
                                                     EBIT=40,00,000

             OPERATING LEVERAGE=CONTRIBUTION
                                                                       EBIT

                                                        3:1=CONTRIBUTION/EBIT
                                                       3:1=40,00,000
                                                       CONTRIBUTION=1,20,00,000
            VARIABLE COST TO SALES=60% (GIVEN)
            CONTRIBUTION TO SALES=40%  (100%-60%)
                                                SALES=(1,20,00,000/40%)X100%
                                                               =3,00,00,000
INCOME STATEMENT
SALES                                                 3,00,00,000
LESS:VARIABLE COST(60%)          1,80,00,000
CONTRIBUTION                               1,20,00,000
LESS:FIXED COST                              80,00,000       (CONTRIBUTION less EBIT)
EBIT                                                       40,00,000 
                                                               

3.What  percentage will  EBIT increase, if sales increase by 10% ? Use question 1 for reference.


ANSWER:  OPERATING LEVERAGE=CONTRIBUTION/EBIT
                                                              =1,20,00,000/40,00,000
                                                              =3
                IF SALES INCREASES BY 10%=3x10%=0.3
                       EBIT WILL INCREASE BY=0.3x100=30%


4. Calculate value of equity share of the company using WALTER'S MODEL from the information given below: 

Internal Rate  Of  Return(%) (R)                                      15
Capitalization Rate(%) (Ke)                                              15
Earning Per Share (In Rupees)                                          12
Cash Dividend Per Share(In Rupees)                                5

ANSWER: AS WE KNOW THAT WALTER'S MODEL IS =D+R/Ke(E-D)/(Ke)
where D=dividend per share
R=rate of return
Ke=capitalisation rate
E=earning per share

                                                                                                =5+0.15/0.15(12-5)/0.15
                                                                                               =5+1(7)/0.15
                                                                                               =12/0.15
                                                                                              =80 Rupees


5. XYLEM LTD. Gives below information. Calculate price per share when no dividend is declared using MM MODEL.

Shares Outstanding         25,000
Current Market Price       Rs 100 Per Share
Capitalization Rate (ke)    20%
Expected Net Profit          Rs 5,00,000

ANSWER:- MODIGLIANI-MILLER Dividend Irrelevance Model
Po=P1+D
      1+Ke
Po=current market price
P1=market price per share at the end of the year
D=dividend to be paid at the end of the year
Ke=is the capitalization rate

100=P1+0
        1+0.20

P1= Rs 120


6. Find price of share as per GORDEN MODEL from the details given below:
Earning per share=100
Dividend payout ratio=60%
Capitalisation rate=10%
Rate of return=10%

ANSWER:-
Gorden Model Po=E(1-b)/(Ke-br)
E=100
b=100%-60%=40%
Ke=10%
r=10%
Po=find
now Po=100(1-.40)/(.10-.40x.10)
Po=100x.60/(.10-0.04)
Po=60/.06


Po=Rupees 1000

Comments

Post a Comment

Popular posts from this blog

QUESTION SET-4 (CBSE COMMERCE NET )

Image
               DEAR READERS,                      Here is another entry in question set series!               11.  Given :             Margin of Safety   80,000            Profit   20,000            Sales   3,00,000            What is the amount of Fixed Cost ?             (1)          1,00,000                 (2)          75,000                     (3)          55,000                               (4)          20,000            ANSWER:-3           EXPLANATION:- as we know that MARGIN OF SAFETY  = PROFIT/ PV              RATIO            80,000=20,000 /PV RATIO            PV RATIO=.25=25%            CONTRIBUTION=SALES* PV RATIO                             =3,00,000*25%                             =75,000           CONTRIBUTION-FIXED COST=PROFIT           75,000-FIXED COST=20000           FIXED COST=55,000           12. Which of the following   is   not   regulated by The Competition Act, 2002 ?
Read more

QUESTION SET 7 (CBSE COMMERCE NET)

Image
QUESTION SET-7 36 . The following is the demand function in the small market: Q=50-5P where Q denotes quantity in physical units and P denotes price of the commodity.At price rupees 5 the point price elasticity of demand would be: A. zero B. equal to unity C.highly elastic D.highly inelasti c ANSWER:-B EXPLANATION :-As we know that Ed=-(dQ / dP ) X (P/Q  ) P=5 (given) Q=50-5*5 Q=50-25 Q=25 dQ /dP=-5 (by differentiating) Ed=(-)(-)5*(5/25) Ed   =25/25 Ed=1 equal to unity 37 . Which one of the following technique for appraisal of investment proposals are based on time value of money a. accounting rate of return b.Internal rate of return c.profitability index d.earning per share codes:- A. a and b B. b and c C.a and d D.a,b and d ANSWER:-B EXPLANATION :- internal rate of return (IRR) and profitability index (PI) are part of discounted cash flow method which consider time value of money. 38.which of the following assumptions is not includ
Read more

BRIEF OVERVIEW OF FOREIGN TRADE POLICY (2015-2020)

Image
BRIEF OVERVIEW OF FOREIGN TRADE POLICY (2015-2020) FTP 2015-20 is introduced with the objective of increasing exports of goods and services as well as generation of employment and increasing value addition in the country so that schemes like  ‘Make in India’ and " digital Inda" can be realised.The focus of the new policy is to support both the manufacturing and services sectors, with a special emphasis on improving the ‘ease of doing business’. kEY HIGHLIGHTS OF THIS SCHEMES ARE:- 1.MEIS and SEIS schemes ► Merchandise Exports from India Scheme (MEIS): There were several reward schemes in for export promotion and in this policy an attempt is being made to rationalize and consolidate them into MEIS and SEIS .Five existing schemes to promote merchandize exports have been merged into a single Merchandise Exports from India Scheme (MEIS). In this scheme, the incentives are to be provided in the form of duty scrips as % of FOB {free on board} value of exports. On
Read more